Tuesday, June 28, 2011

Predicting Strategic Residential Mortgage Defaulters

Empty mailbox fronts foreclosed home, Reuters 6/2011
A new Experian study that showed up last week on the Reuters wire shows that Strategic Defaulters – those who voluntarily stop making their mortgage payments - are financially astute, and often already have their next home and loan before they walk.

“They are high income, they are high wealth, they own multiple homes, and they have higher (credit) scores," Tracy Bremmer, director of product marketing and management at Experian, told Reuters.   Experian is trying to identify Strategic Defaulters before the fact, so that banks can strategically head them off at the pass.   

"Lenders are still interested in educating people about whether they really understand the repercussions," added Andrew Jennings of FICO. Jennings explained that 40 states allow lenders to go after foreclosed borrowers for the extra money that was promised in the mortgage but not collected during the foreclosure sale.  FICO, for their part, recently launched a new scoring algorithm to point lenders to borrowers who are likely to strategically default before the fact.  An earlier study by FICO found that strategic defaulters had relatively strong median FICO scores of 663 and low credit card balances.  Here is some real fodder for your predictive models:
  • They may have applied for other credit recently,
  • They are upside-down on their mortgages, owing more than the home is worth, and, note this friends,
  • Are heavily concentrated in geographic areas where the pace of home values falling below mortgage balances is accelerating.
FICO also indicates that they have ongoing research that suggests that 18 months after foreclosure, the majority are having other financial problems.

The Experian study finds that 3 percent of strategic defaulters (who in turn make up about 17 percent of all defaults) went out and obtained new mortgages just before they stopped making payments. "That strategy is certainly in place," said an Experian representative. "Strategic defaulters carefully plan ahead of time before defaulting in order to purchase another home prior to leaving their current home."  At that point, their credit scores and earnings histories might easily qualify them for the new loans.  Once they settled on the new home and stopped making payments on their old home, they would not have to worry so much about the resulting credit score hit. 

What does this tell us?  A lot.  We can use this information in our GIS to both identify risks in our portfolios, and possible new opportunities in our communities (the last FICO finding notwithstanding).

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